70% chance of Greece being expelled from the Eurozone
70% chance of threat to oil supplies from the Persian Gulf
30% chance of nuclear war in the Middle East
90% chance of Extremist Islamic Government in Egypt
Happy New Year everyone! We would all like to know what will happen in the coming year, especially in these turbulent times.
Accurate predictions depend upon a knowledge of the world and relatively simple rules of cause and effect. Unfortunately our world is organic, it contains billions of semi-independent entities that consume, grow, compete, divide and even disappear. Organisms are also susceptible to catastrophes and unexpected changes such as epidemics or the invention of broadband. The best I can do is to point out the main branches in world events and speculate where they might lead. In particular I will seek out those branches that reinforce each other.
The most important occurrence in the world economy is the shift of production to Asia. It is this shift that has created the deficits that are fueling the current international financial crisis. (See The World Financial Crisis).
The shift of production to Asia has been deliberate European and American policy over the past 20 years. There has been a lot of media propaganda declaring that this shift is inevitable and makes us more competitive but in truth it is just the old story of the rich merchants, traders and bankers finding that it makes them richer. This branch of events has an end-point at which Western wages fall towards those of the Chinese or Indians. At some time during this fall in wages and living standards the people in the West will demand change. But not this year, this year the people will still believe the corporate mantra that Globalization is inevitable and internationalism the best hope for mankind. However, this main branch of events, the trade deficit, will expose us to the full force of global instabilities.
One of these instabilities is the National Debt crises, the borrowing that Western Governments use to finance their deficits. The Western economies borrowed vast amounts of money all through the noughties as part of the transfer of funds to Asia, this borrowing was exposed by the subprime crisis in 2008 which showed that the Western treasure chest was empty and had a continuous leak in the form of a massive trade deficit with the East.
Notice how these two events, the Asian trade deficit and the National Debt crisis reinforce each other. The Germans already know about these issues and have been running their economy, to some degree, for the benefit of their people, preserving manufacturing and local industry. The Germans are also very attached to the idea of a greater Europe as a single nation. The challenge for the Germans is how to get the other members of the Eurozone to stop buying Asian goods with borrowed money. They are faced with several difficulties, the first is to persuade their own people that funds should be spent on other Eurozone members such as the Italians, the second is to persuade the people in countries that borrow that they cannot continue to borrow and the third is to prevent civil disorder in the South.
My prediction, with a 70% likelihood, is that the Germans will expel Greece from the Eurozone in 2012. They will do this in an orderly fashion, compensating any eurozone banks outside of Greece for the cost, so avoiding a banking crisis. The dislocation in Greece will create mayhem for the Greeks and provide an example to Italy, Spain etc. of what might happen to them. The chastened populations of the South of Europe will then tow the line. If any British and American banks are still exposed to Greek government bonds we deserve what will happen to us.
The other possibilities, a Eurozone recovery and a generalized Eurozone breakup are at 10% and 20% likelihood.
My prediction for Britain is that we will experience inflation. This is an alternative to borrowing, it makes us all poorer but reduces the real price of housing and increases our competitiveness. We could borrow money on the international bond markets but this would simply increase our indebtedness - the Germans know this is a mistake, the Tories know this is a mistake - it is only Labour, who created our crisis by excess borrowing and deregulation who refuse to admit that borrowing would be a mistake. Labour want our children to bail us out by repaying our debts in 20 years time. My guess is 5%-7% inflation for the year. I would guess a 90% likelihood of inflation at over 5%.
On the subject of International Relations, the worst problem is Iran. The Iranians must be at the stage where they have one to five atomic bombs. They are probably negotiating with the North Koreans at this very moment to buy more - they bought their missile technology so why not buy bombs as well? The North Koreans desperately need cash and the Iranians want bombs. The Israelis suspect this is the case but they may be afraid to act because even two atom bombs could destroy Israel and the Iranians already have the missiles to deliver these bombs. If the Iranians were not developing nuclear weapons they would not be threatening to close the Straits of Hormuz to stop sanctions, they would simply invite weapons inspectors to tour their country. This coming year is the highest risk for the Iranian problem because the Israelis might believe that there is no alternative to a pre-emptive strike against Iran to prevent further bomb development. Next year the Iranians will probably announce that they have ten bombs so it will be too late. My prediction is that there is a 30% chance of nuclear war in the Middle East and a 70% chance of increased tensions threatening global oil supplies.
Iraq will continue an inexorable fragmentation into Kurdistan, a Sunni central state and a Shia southern state. The West should be financing the Kurds and the Shia but the Kurds are unpopular with Turkey, an important Western ally, and the Shia are natural allies of the Iranians.
Afghanistan will continue with the status quo. The West should concentrate massive support for infrastructure and industry in the North to ensure the survival of the Northern Alliance but will fail to do this. Pakistan will totter on the edge of a military coup (30% chance this year).
Syria will descend into civil war, largely financed by other Middle Eastern states. Egypt and Libya will follow in Tunisia's footsteps and acquire democratic, extremist Islamic governments (90% chance), making Israel feel even more insecure. One thing all of these countries share is a bitter and implacable hatred of Israel. I do not predict Western intervention in Syria (10% chance). In the absence of a nuclear war, at the end of 2012 the world will be facing a Salafist/Wahhabi block stretching from Tunisia to the Persian gulf and into Pakistan (90% chance). Think this is the "Arab Spring"? Think again, Osama Bin Laden was a Wahhabi.
Japan will recover from the earthquake and start growing on the back of Chinese internal growth.
In domestic UK politics I predict that the unions will behave as they did in the 1970s and create nasty conditions for everyone from mothers needing to stay home to care for their children whilst well paid teachers protect their pensions to commuters struggling into work against endless transport strikes led by the communist Bob Crow and his cronies whose aim is anarchy. The Lib-dems will either become increasingly feisty to demonstrate their separateness from the Tories or senior Lib-dems will have secretly decided to stand as Tories at the next election (50/50).
The biggest risk in 2012 is instability in the Persian Gulf exacerbating the economic crisis. If there is no nuclear war in 2012 the Islamic states will present a united power block that Israel will be unable to ignore. This can go two ways, either the Israelis withdraw from Palestinian territory and accept the Oslo borders or there is a nuclear war later.
In the absence of Middle Eastern problems such as the closure of the Straits of Hormuz or nuclear war I would predict a continued year of stagnant growth in the UK, with everyone being 5-7% poorer as a result of inflation. This might convince the government to concentrate on policies that replace foreign imports from the EU and Asia with home produced products, so reversing the catastrophic policy of buying manufactures from overseas that has undermined us for the past 20 years.
Most importantly, I predict that for 2012 the occupy movement and other nascent political movements will still consist of schizophrenic people wandering about thinking "globalisation good, globalisation inevitable" whilst crying out against the banking crises, unemployment, global warming and middle east wars which are all symptoms of globalization. Events will need to be a bit worse before the zombies awake.
What to do? Safe investments are highly problematical. Gold is already dangerously high, if events turn out to be less menacing than they appear you could lose a fortune. Property will devalue by about 2% in the UK plus 6-7% inflation so will lose c.8%. Stocks will plunge if there is trouble in the Middle East. UK Government bonds and Chinese or Japanese stocks look interesting but inflation will chop away the benefit of UK gilts and if the Chinese/Japanese Stocks/Japanese bonds are bought through a third party they will steal all the profit.
Risky investments are available. If you want a "big dipper ride" then French government/ECB bonds, bought just after the exit of Greece might be a good gamble - if Greece is safely ejected from the Eurozone the Eurozone crisis will be over although there will be a couple of months of media panic. The lability of the stock markets will be good news for gamblers. Military equipment suppliers may also be a good gamble.
The only safe domestic investment is probably property, the Tories are still allowing hundreds of thousands of immigrants per year so there will be demand for housing for a few more years and hence no sudden collapse in the market (See Immigration, house prices and boom economics).
Of course, if there is a local nuclear war there will be pandemonium and all bets are off. It would be wise to keep some portable wealth against catastrophe.
See:
The world financial crisis
The advantages of Globalization
EU Membership and laying up treasure from overseas
The roots of islamic terrorism: the Wahhabis of Saudi Arabia
The European Civil War
Communism and the education system
The future of Afghanistan
Korea, Vietnam, Iraq and Afghanistan
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